A great chart and very appropriate to a column written by Dick Green, Founder and Chairman, Briefing.com, this morning about the S&P-500 earnings and price situation.
briefing.com
<<Last Update: 30-Mar-12 08:51 ET
The Rally is Fully Justified
Stock futures indicate an up open of about 6 points for the S&P 500. That would put the index on track for a 12% gain for the first quarter of this year.
There is a lot of head scratching and anxiety over the surprising rally of the past few months. Many analysts look to explain the improvement in equity values in terms of the Fed enhancing liquidity, or simply the reduction in "tail end risk" associated with a lower probability of a credit crisis in Europe.
In fact, our January 3 Big Picture article titled "The Bullish Alternative" laid out the rationale for a 20% gain in the S&P 500 this year based on fundamentals. The S&P 500 index started 2011 at low valuations. S&P profits were up 14% in 2011, yet the index was flat. If profits rise 6% this year (general expectations) the S&P could rise 20% in 2012 just to keep up with the profit gains over 2011-2012 and still maintain low valuations.
The gains in the S&P 500 this year simply reflect the index gaining ground consistent with profit gains last year. There was some serious catching up to do. The reduction of risk from Europe has allowed it to happen quickly.
A correction is always possible after a strong run such as occurred recently, but market participants need not worry about a mini-bubble or irrational exuberance. The rally is justified based on the fundamentals.
Today, there might be some end-of-quarter buying by portfolio managers getting fully on board with that theme.
February personal income was up 0.2%, a tad below expectations of a 0.3% gain. Spending was up 0.8%, a solid gain that was a bit higher than expected. These data won't have much market impact. The key inflation index associated with these data, the core personal consumption expenditure deflator (PCE) was up just 0.1%. That is a Fed favorite for measuring inflation and doesn't reflect price pressures at a level of any concern.
There are reports that European finance ministers will soon announce enhanced measures to address the sovereign credit crisis. That is providing support to the stock market today. The Chicago Purchasing Managers index is due at 9:45 ET and the finalized Michigan sentiment index is due at 9:55 ET.
The market has shown tremendous intra-day resilience this past week even after significant down opens. The pattern of bouncing mid-day has been a boon to day traders, and reflects underlying support for equities. There has not been extended selling even on bad news.
Upcoming earnings reports may present some headwinds for the market, and the upward momentum has stalled, but the market action has been surprisingly good. The fundamentals remains bullish.>>
From your chart of the day writeup:
<<As a result of the continued surge in corporate earnings the PE ratio remains at a level not often seen since 1990 despite what has been a significant upward trend in stock prices so far this calendar year.>> |
